Last updated: July 2013
Fossil fuel subsidies
Platform reports on hidden government support for the oil industry through military subsidies, diplomatic support and credit guarantees.
Fossil fuel subsidies are becoming an increasingly visible political issue, and not just among the usual NGO suspects. A whole host of not-so-radical institutions like the World Trade Organisation, the G8 and the World Bank have all made statements identifying the phasing out of fossil fuel subsidies as being an urgent and necessary step in dealing with the threat of climate change.
The chief economist of the International Energy Agency (IEA) says that, “Energy markets can be thought of as suffering from appendicitis due to fossil fuel subsidies. They need to be removed for a healthy energy economy.”
Subsidies are also unpopular because they mean massively profitable energy companies get extra handouts from the government. So it’s understandable that the sector wouldn’t want to be too close identified with them..
Malcolm Webb, the Chief Executive of industry lobby group UK Oil & Gas certainly doesn’t want to be. Even we were a bit taken aback when at an energy conference in Aberdeen in May he boldly claimed that, “The oil and gas industry enjoys no subsidy from government, nor are we asking for any.”
This is where the question of defining subsidies becomes critical. We’d like to think that Malcolm isn’t telling an outright lie, so what he is doing is talking about subsidies using a very particular and very narrow definition. When he was challenged on this, he said that, “A subsidy is monetary support from government that reduces investment to below the cost of production.”
The IEA are much more encompassing when they define a subsidy as, “any government action that concerns primarily the energy sector that lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by consumers.” One of the key differences between those two definitions is that it broadens the nature of the support from being purely ‘monetary’ to ‘any government action’, and this is critical to understanding the nature of fossil fuel subsidies in the UK.
There is a huge amount of monetary support for the oil and gas industry in the UK – research from Friends of the Earth shows that North Sea production has received £864m in tax breaks since the 2012 budget – but the type of subsidies that are most prolific in the UK are ‘off-budget’ – that is, transfers to energy producers and consumers that do not appear in national accounts as government expenditure.
On-budget or off-budget
The IEA has commented that OECD governments “like to keep subsidies ‘off-budget’ for political reasons; on-budget subsidies are an easy target for pressure groups interested in reducing the overall tax burden,” – or in this case, pressure groups interested in making progress on the transition to a low carbon future.
With the parliamentary Environmental Audit Committee currently discussing the issue of fossil fuel subsidies in the UK, it’s vital that we ensure that the broader scope of subsidies is used, even if they are more challenging to identify and quantify. We’ve identified three areas of subsidies in the UK that are routinely making it more profitable for oil and gas companies to function – military subsidies, diplomatic subsidies and underwriting export credit.
The UK Government provides fossil fuel companies with military subsidies to secure key overseas oil and gas infrastructure and transport routes. For example, figures released under the Freedom of Information Act show that the UK spent close to £12 million in military aid in Nigeria since it revived ties with the regime in 2001. Spending has risen consistently over the last decade. The UK has established a permanent naval facility in Lagos to train the Nigerian military to secure the Delta’s oil fields in British loaned boats.
Such subsidies are often brought about as a result of corporate lobbying. For example, UK Government documents from 2006 reveal that Shell lobbied the UK and US Governments to increase military aid to secure their oil fields in the Niger Delta. Military aid was subsequently increased over the next 4 years.
Lobbying for increased spending
Similarly, the provision of UK frigates to the NATO and EU flotillas patrolling the waters off Somalia enforces the passage of tankers through the Gulf of Aden. In 2010, Jan Kopernicki, President of the British Chamber of Shipping and also Vice-President of Shell’s shipping arm, was lobbying hard for the UK to increase Navy spending and bring forward the acquisition of a new generation of warships, to support the private oil tankers moving through this ‘vital strategic artery.’
The UK Government does not appear to have made any demands for accountability in the Nigerian armed forces in return for military aid. Instead the UK has frequently turned a blind eye to Nigeria’s excessive use of force. For example, on 1 December 2010, Government forces reportedly attacked a town in Delta State called Ayakoromo because there may have been a militant camp near or in the town. The number of dead is still disputed. One report claims that 100 were killed, mostly children, the elderly and women. The Red Cross says that it was barred from entering after the raids. There has been no official inquiry into the tragedy. Though Nigerian troops have failed to resolve the Delta conflict, the UK and US have actively supported the militarisation of the area and the wider Gulf of Guinea.
The British Government supports the interests of oil companies operating overseas, through various departments including the Department for International Development, the Foreign and Commonwealth Office (FCO), the Department for Business, Innovation & Skills and UK Trade & Investment (UKTI). It is David Cameron’s stated policy that diplomats should prioritise promoting “UK-based” business interests and, apart perhaps from arms companies, fossil fuels receive the largest share of this support.
Day-to-day phone calls and intelligence gathering on behalf of BP and Shell are the staple of UK embassies abroad, involving commercial attachés, secretaries for energy and ambassadors. These costs add up – until October 2012, the FCO was maintaining a consulate with three diplomats in Basra largely to meet the needs and demands of BP and Shell. At over £2 million per diplomat per year, the £6.5 million annual budget was significant. Ongoing lobbying is backed up by high-profile ministerial handshakes and official trade missions.
Close state backing for oil companies is particularly crucial when oil companies are forcing their way into new countries – whether that is Tony Blair’s support for BP and Shell in breaking into Libya in the 2000s, the heavy lobbying on behalf of Western oil interests in occupied Iraq after the invasion, or the same companies entry into newly independent states of the Former Soviet Union in the 1990s.
Contract of the Century
FCO support was vital to BP obtaining the strongest hand in the key ‘Contract of the Century’ in Azerbaijan in 1994, which has underpinned the company’s pivotal position ever since. Responding to specific requests by BP, the FCO organised visits of high-profile UK political figures to Azerbaijan at moments that were strategically important to the company, such as the 1993 visit of former Prime Minister Margaret Thatcher. Co-operation between the FCO and BP was so close that the UK’s first ambassadorial staff in Azerbaijan were housed within BP’s offices.
In December 1993, Foreign Minister Douglas Hurd emphasised that there were some parts of the world, such as Azerbaijan and Colombia, where the most important British interest was BP’s operation. In those countries he was keen to ensure that our efforts intertwined effectively with BP’s.1
It is clear that BP’s operations continue to be a key concern for diplomats in Azerbaijan. On 17 October 2012 Peter Bateman, the UK ambassador in Baku, sent a diplomatic telegram about Azerbaijan president Ilham Aliyev’s critical statements about BP’s output from the Azeri-Chirag-Guneshli (ACG) field. In it he said “I shall be calling on BP in London next week to find out what more, if anything, we can do to help.” and added, “We must continue to take our lead from them [BP].”
Azerbaijan is just one country of many where this level of diplomatic support is offered to oil companies. Other examples include:
- A meeting in February 2013 between the UK Prime Minister, David Cameron and Nigeria’s President Goodluck Jonathan. In this meeting they discussed “how to ensure the Nigerian Petroleum Bill encouraged maximum investment from other countries in Nigeria’s energy sector.”
- Eighteen months of meetings between Anne Pringle, British ambassador in Moscow and BP as the company was making its first attempt to broker a deal with Russian oil company Rosneft. This culminated in Chris Huhne, Energy Secretary, attending the signing ceremony which was later ruled to breach a shareholder agreement.
- Foreign Secretary William Hague lobbying “strongly” on behalf of Tullow Oil over a dispute over the company’s £175 million unpaid tax bill.
These are just some examples but they point to a system of continuous, systematic diplomatic support for a handful of fossil fuel companies.
Underwriting export credit
From its offices in Canary Wharf, UK Export Finance (UKEF), previously known as the Export Credits Guarantee Department (ECGD), uses billions of pounds of public money every year as credit lines and insurance for UK companies exporting overseas. UKEF has been providing credit to fossil fuel projects for many years. This public subsidy has continued despite Coalition commitments to end “investment in dirty fossil-fuel energy production.”
ECGD, and now UKEF’s, decision-making has been so controversial over the years that it has been dubbed the “department for dodgy deals” because of its support for corruption, pollution and arms sales to repressive regimes.2 Crucial information regarding dangerous impacts is repeatedly – and sometimes consciously – ignored. Offers for credit lines for particular projects are often made first, with the various potential UK exporters only identified later. UKEF has no climate change policy for its projects, nor does it have an emissions reduction target. To this day, UKEF continues to provide financial support to some of the most controversial fossil fuel projects.
Particularly problematic subsidies provided by the ECGD/UKEF include:
BP – Baku-Tbilisi-Ceyhan Pipeline – Azerbaijan / Georgia / Turkey
UKEF chose to support this project to the tune of £81.7 million, despite a multitude of reported and documented infringements on citizens’ rights. There were over a hundred violations of World Bank standards, emergency powers were invoked to acquire land in Turkey, and the UK government itself ruled that BP had violated international rules by failing to investigate complaints of intimidation by state security forces in Turkey.
Shell – Sakhalin II – Russia
Shell’s drilling, pipelines and LNG plant in Arctic conditions on Sakhalin Island threatened indigenous populations and highly endangered populations of whales. Nonetheless, UKEF gave a secret but legally-binding commitment to support the project in March 2004 worth £1 billion, before an adequate EIA had been completed and before UKEF’s own assessments were complete. The application to UKEF was only withdrawn because of a judicial review over its illegality.
KBR – Bonny Liquified Natural Gas (LNG) – Nigeria
UKEF decided to finance KBR, a subsidiary of Halliburton, despite specific allegations of the company’s corruption in relation to the Nigerian Bonny LNG project being common knowledge. After international investigations started into the bribery, minutes of meetings between UKEF and Halliburton show UKEF failing to ask Halliburton for crucial details of the allegations, telling the company that it did not wish to ‘delve into the finer details’ of the consortium’s arrangements. The Halliburton subsidiary eventually pleaded guilty in both the USA and UK.
Petrobas – ultra-deep Atlantic drilling – Brazil
In 2011-12, UKEF agreed a $1 billion credit line to support Brazil’s state-owned oil company Petrobras to conduct ultra-deep drilling in the pre-salt oil deposits in the Atlantic Ocean. This drilling is more complicated and dangerous than the deep Gulf of Mexico wells where BP’s Deepwater Horizon disaster took place.
Other fossil fuel subsidies provided by the UKEF in the last two years include: £65 million for a petrochemical plant in Saudi Arabia, £22 million to a Norwegian offshore oil contractor, £6m for a petrochemical plant in Azerbaijan and £6m for a gas plant in Nigeria.
Lisa Nandy MP, chair of a parliamentary inquiry into UKEF said: “It is a cause of real concern that, despite the coalition commitment to end all export finance for dirty fossil fuels, particularly the risky Atlantic oil drilling, UKEF still funds so many fossil-fuel-related projects and has so far failed to support a single green energy project.”
Our failure to meaningfully address the threat of climate change to date is in no small part related to the various arms of governmental institutions intimately supporting the expansion of the fossil fuel industry. Recognising the nature of these links in the context of subsidies and unpicking them would prove invaluable in moving forward to a low-carbon future.
Platform combine art, activism, education and research in one organisation to create unique projects driven by the need for social and ecological justice. Its current campaigns focus on the social, economic and environmental impacts of the global oil industry.